Demand Side Response: Reducing demand to reduce costs

Keeping energy bills low for families and businesses is a topic that regularly makes headlines.

In the recent debate about whether Hinkley Point C should be approved, which included looking at its effect on the cost of consumer bills, one of the most often discussed alternatives to building the new power station was focusing more on Demand Side Response (DSR).

What is Demand Side Response?

DSR is about the use of electricity, rather than how it’s generated.

When total demand for electricity across the whole of the UK is at its highest for example, when we’re all glued to the Great British Bake Off final – through DSR, we can use electricity more intelligently, rather than simply generating more electricity to meet short periods of huge demand. This doesn’t mean your oven or TV will be switched off! Instead, supermarkets might turn down their freezers, or large factories might delay an energy-intensive process to another time, when there’s not so much rush-hour traffic on the energy grid.

But why not just build new generation?

There are very few periods throughout the year when demand is very high – in fact, the greatest 2GW (the new nuclear power station, Hinkley Point C, will be 3.2GW) of electricity demand occurs just 0.6% of the time.

So rather than building a power station that will only be used for a few hours a year, it makes more sense to occasionally reduce overall demand; not only will this make better use of existing resources, it will probably cost a lot less too! It’s at times of very high demand that the electricity grid also tends to be the most polluting as older, less-efficient fossil fuel generators are called upon to meet these occasional needs. Demand Side Response limits the number of hours that these dirty generators need to run for and helps maximise the usage of renewable generation instead.

How much does DSR cost?

DSR also has an effect on the price we all pay for our electricity. It’s at peak times that the wholesale price of electricity is highest – so reducing demand at peak time should lower electricity prices.

Last year, Good Energy did some research which showed how wind and solar actually helped to reduce the wholesale cost of electricity by over £1.5 billion in 2014.

This was a result of something called the Merit Order Effect. This work has been recognised by the National Audit Office as part of a new report which asks whether the Levy Control Framework - the mechanism designed to limit consumer spending on energy policies – is actually delivering value for money for the consumer. A year after our original work, we decided to calculate the Merit Order Effect of DSR.

Merit Order Effect and DSR

Using the same method to calculate the savings delivered by wind and solar, we estimated how much wholesale prices would decrease by if DSR reduced demand for electricity a few times throughout the year. Our results show that 2GW of reliable DSR (i.e. that which would always be available to reduce demand when required) could have reduced the wholesale cost of electricity by around £30 million in 2015 if called upon for the top 100 half-hourly periods of greatest electricity demand on the grid.

This equates to a saving of around £300 for every MWh megawatt hour called upon , which means that if less than £300 was paid to the DSR provider, there would be a net saving to the consumer!

What other benefits are there?

DSR could also lead to a reduction in the amount of generation waiting in the wings, which currently costs the bill payer around £1bn/year and is ready to generate at periods of peak demands,. It could also reduce the amount we have to pay towards maintaining the electricity network which is designed to cope with the few hours a year of peak demand.

Increasing demand means costly upgrades to the system! So if DSR is such a good idea – why doesn’t the UK use it?

The answer is, we do but not enough!

What is holding Demand Side Response back?

Firstly, many businesses don’t know enough about DSR and some are wary of it. But why? Unfortunately, some associate it with tight capacity margins and believe it is a sign that a country doesn’t have enough electricity generation capacity and may be at risk of blackouts. But this isn’t the case at all – it’s simply a more efficient and economical way of utilising existing resources.Secondly, there is not enough support for DSR. National Grid recently cancelled one of its DSR services which did not send out a very good message!

Finally, DSR is not currently competing on a level playing field. The most recent Capacity Market auction (the Government mechanism to ensure there is enough generation to meet demand over the winter period) secured just 0.45GW of DSR compared with 42GW of existing generation and 2GW of new generation. Unlike new generation, which is able to secure a 15 year contract, DSR can only get a 1 year contract – this is highly likely to put off businesses who are considering investing in DSR. This needs to change.

What next?

DSR can reduce consumer bills, lower carbon emissions and make more efficient use of our existing electricity generators. Good Energy believes DSR, storage and other smart technologies will be key to transitioning to a 100% renewable future. This view is shared by the Committee on Climate Change (the independent advisor to the Government). Be part of the movement towards this. Switch to 100% renewable electricity and Green Gas today.